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Food vs. Fuel - Not That Simple

posted on May 22, 2008 at 6:09 PM

Food and gasoline prices are on the rise. Ironically, critics tend to see
the soaring costs as independent of one another. Grocers blame farmers for high food prices, farmers say food prices are
reflective of higher transportation costs while the petroleum industry insist
it’s all the fault of speculators who are buying an array of commodities
anticipating demand will drive prices higher.

Actually, grocers and farmers like
to blame the speculators as well. Be it low prices or high, futures and options
traders are always convenient scapegoats.
But this time the reptilian speculator is seen as mere agent of evil.

A chorus of critics suggests
the dark catalyst for the current soaring food and fuel prices is America's ethanol boom. They blame it for everything from higher food
prices to starvation in 3rd world countries.
And the debate over whether corn should be used for food or fuel is far
from over.

Just six months ago in December 2007, President Bush
signed a sweeping energy bill. The
measure demands higher fuel efficiency for cars and trucks and an aggressive
mandate for biofuel production.

President George W. Bush: “The bill I sign today takes a
significant step because it will require fuel producers to use at least 36
billion gallons of biofuel in 2022. This
is nearly a fivefold increase over current levels.”

Many members of Congress that Bush thanked in 2007 have
shifted their position on a renewable fuels mandate. In six months time, gas prices have
skyrocketed … food costs have soared … global hunger has grown … and many
lawmakers and pundits are pointing the finger at corn-based ethanol. In the past month, major congressional
committee hearings have probed if and how ethanol may be driving high food and
energy costs.

Rep. Greg Walden: “I understand that Chevron blends about
40 percent of its gasoline in the United States with ethanol. Is that driving gas up or not?”

Peter Robertson, Chevron: “Ethanol prices have been
pretty volatile over the last couple of years but I think it's a very small
part, frankly, of the price of gasoline.
I think it's been already testified 70% of the price of gasoline is
crude oil, 15% of the price of gasoline is taxes even though ethanol is about
5% of our gasoline that volatility hasn't had much of an effect.”

In an April hearing, oil company executives pointed
towards crude oil and the growing power of speculators in the commodity markets
as the root cause of high prices at the pump.

J.S. Simon: “When you look at the fundamentals of our
business, Congressman, the supply-demand fundamentals, our assessment would be
the price should be somewhere around $50, $55 a barrel. There is a disconnect. To me there's three factors that contribute
to that. One is the monetary issue of
the weaker dollars we've already talked about.
The other is geopolitical risk and the third, we believe, is
speculation.”

One executive claimed internal analysis of only supply
and demand pegged the price per barrel of oil at $55. He elaborated that a weak dollar and
speculation were overwhelming factors in more than $120 oil.

A recent study at Iowa
State University
in Ames, Iowa,
claims a growing ethanol market has actually lowered gas prices by as much as
39 cents in the Midwest. But even if ethanol critics concede the
renewable fuel isn’t driving gas prices higher, costs at the checkout counter
are another story.

Prices for commodities like corn, beans and wheat have
doubled and even tripled over the past year.
Biofuel critics have drawn a direct link from ethanol to high corn costs
to even higher grocery prices to worldwide starvation. A United Nations report blasted the use of
food as an energy source and called American biofuel production a crime against
humanity.

The connection between food, fuel, starvation and ethanol
has led some farm-state lawmakers to push back hard.

Sen. Charles Grassley: “And I don’t think farmers can be
responsible for the high cost of food. I
went out this morning and bought a big box of Corn Flakes
for $5. It would be about a nickel that
the farmer gets out of this box of Corn Flakes.”

Iowa Senator Charles
Grassley is a staunch defender of corn-based ethanol. In a recent press conference, Grassley
characterized the renewable fuel as a scapegoat for economic problems.

Sen. Charles Grassley: “When a farmer gets so little out
of a box of Corn Flakes don’t be blaming the farmer and ethanol for the high
price of food. You know, I get the
impression that people think that they’re eating this corn. This is what we make ethanol out of. I don’t know whether people that are
complaining about corn increasing the price of food or not, maybe they think
it’s the seed corn, I don’t know. But
take one of these kernels here and chew on it.
It’s not something that you would sit down to your kitchen table and
eat.”

Farm-state lawmakers like Grassley have reached a boiling
point following months of negative newspaper
editorials and scathing magazine covers.
But many biofuel critics claim there is truth behind ethanol forcing
high costs in the supermarket.

Perhaps the strongest link is meat prices. Farmers and ranchers are paying much more for
corn-based feed needs in the world of $6 corn.
But evidence points to a stronger relationship with high transportation
costs for all grocery items.